Summary
Gauntlet supports using excess reserves on each market to be auctioned for WELL, in order to bolster the Safety Module Ecosystem Reserve. Gauntlet recommends minimum reserves for each assets as follows based on current market parameters:
Asset Minimum Required Reserves
| Asset | Minimum Required Reserves ($) |
|---|---|
| WETH | $25.25M |
| USDC | $17.69M |
| cbBTC | $12.35M |
| AERO | $5.65M |
| cbETH | $4.45M |
| wstETH | $4.39M |
| EURC | $1.99M |
| LBTC | $782K |
| weETH | $746K |
| tBTC | $371K |
| rETH | $383K |
| WELL | $422K |
| wrsETH | $321K |
| USDS | $66K |
| DAI | $26K |
The above figures serve as a conservative baseline for minimum required reserves. Gauntlet will continue to refine these levels as market conditions evolve. Given the above, deprecated assets such as DAI and USDbC can begin auctioning their reserves.
Rationale
The fundamental risk to a lending protocol stems primarily from collateralized positions that might default. To properly assess this risk, we should focus on an asset’s actual borrowing capacity rather than its Total Value Locked (TVL). This borrowing capacity is determined by multiplying the asset’s supply cap by its Collateral Factor (CF), which establishes the maximum amount that can be borrowed against that asset.
For example, if an asset has a supply cap of 1 million units and a Collateral Factor of 0.75, the maximum protocol exposure would be 750,000 units worth of borrowing capacity, regardless of how much of that asset is actually supplied to the protocol. This calculation provides a more accurate measure of potential risk exposure than TVL, as it represents the true maximum amount the protocol could lose in a worst-case scenario where all borrowers default simultaneously.
We define the Minimum Required Reserves as follows:
This represents the maximum risk the protocol faces or the highest potential debt collateralized by an asset, assuming all suppliers default on their obligations.
The above depicts the annualized growth of reserves if the borrow APR is at kink. The Annual Reserve Growth provides an additional buffer by allowing reserves to rebuild naturally over time. It ensures that reserves are only sold after accumulating for at least an year, preventing premature depletion.
Therefore, the Minimum Required Reserves can be estimated as:
Where,
Since not all borrowers default at once and liquidations are not entirely unsuccessful, and given that the collateral factor already serves as a buffer, we recommend setting the shortfall percentage based to be 10% market-wide as a conservative proxy for the maximum risk that is actually realized.
Then,
Any reserves above this can be considered excess.
For example:
- Borrowing Power = $10M (Supply cap x Collateral Factor)
- Shortfall Percentage = 10%
This represents the base protection against maximum protocol risk. The 10% means we’re keeping enough reserves to cover a complete failure of 10% of all possible borrowing power. - Reserve Growth Rate = $100K/yr
This represents one year’s worth of natural reserve accumulation. By adding this, we ensure that even if we auction excess reserves, we maintain enough buffer. - Minimum Required Reserves = $1.1M = $1M + $100K
This above suggest sufficient reserves to both:
- Handle a major market event affecting 10% of maximum borrowing
- Continue normal operations with expected reserve growth
If Current Reserves = $1.5M, then Excess = $400K could be auctioned.